Seven Key Questions for Evaluating a Private Company

15 May 2018·

The questions below help Investors to develop a more comprehensive understanding of an Issuer rather than overweigh certain characteristics of the business which, in and of themselves, are not sufficient to justify investment.

1) What is the Product or Service?
  • Product/service characteristics
  • Nature of the product (disruptive technology, better solution, lower cost, etc.)
  • Differentiation
  • Barriers to competition
2) Who is the company?
  • Management (prior business/background, personal motivation, ownership, compensation issues, personal financial condition, “the right stuff?”)
  • Ownership (vis-a-vis key managers, Board involvement, implied valuations)
3) What stage is the Company?
Does the company have revenue history, profitability, operating cash flow?
4) Who are the customers?
  1. Historical and/or projected
  2. Macro issues
    • Aggregate market size
    • Drivers of demand (fear versus greed)
    • Competition
  3. Micro issues
    • Target list of near-term customers
    • What drives a given customers decision to buy the company’s product
    • Sales/marketing plan (short-term and longer term, branding)
5) How is the product/service produced?
  1. Creating the deliverable
    • Pre-production (talent required, IP, regulatory, site selection, capex required, construction timeline, etc.)
    • Production processes (cost, complexity, vulnerabilities, logistics)
  2. Challenges to production/competition
    • Regulatory, “art,” capex, logistical
    • Barriers to entry
6) How does the company make money?
  • Gross margin analysis
  • Pre-tax profitability and cash flow
  • Balance Sheet review (capitalization, use of debt)
7) How will investors be paid back?
  • Equity – what is the future liquidity event (strategic sale, recapitalization, IPO, etc.)
  • Debt – Company’s cash flow generating capacity, etc.

Making an investment in a private Company requires significant analysis of the Issuer.  For a brief review of the risks and potential rewards of investing in private companies, please see “Risk versus Return Considerations for Alternative Investments.”